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Liberals' middle class income tax cut passes House vote

Andy Blatchford, The Canadian Press
Published Wednesday, December 9, 2015 4:14PM EST
Last Updated Wednesday, December 9, 2015 6:34PM EST

OTTAWA -- The Liberals faced accusations of broken election vows Wednesday as their centrepiece pledge to raise taxes on the biggest income earners, while cutting them in a lower bracket, passed the House of Commons.

MPs voted 230-95 in favour of a motion to enact a package of tax changes that will, in fact, starve the treasury of a net $1.2 billion in each of the next five years.

This comes after the Liberals told voters the headline change in that package -- the income tax cuts and increases -- would be revenue-neutral.

Earlier this week, the government acknowledged the $1.2-billion shortfall. The announcement followed the party's recent moves to back down from another campaign pledge: capping Ottawa's annual budgetary deficits at $10 billion in 2016-17 and 2017-18.

Prime Minister Justin Trudeau only added to the doubt Wednesday that the government would be able to keep those shortfalls from slipping deeper than $10 billion, particularly in a hobbled economy.

"We always targeted modest deficits, we had hoped it would be around $10 billion -- we will see if we will be able to hold at that level," Trudeau told reporters after the tax motion passed.

During the campaign, Trudeau vowed to respect the $10-billion upper limit for deficits unless the economic situation got "radically worse."

On Wednesday, he expressed concern for the state of the economy and called the oil-price and revenue forecasts in the previous government's April budget "wildly optimistic."

"And things have gotten significantly worse from those rosy projections, even assuming those rosy projections were anchored in reality," Trudeau said.

The Liberals have argued their tax-bracket tweaks will help the country's weakened economy, because middle earners are likely to spend what they save on income taxes.

Starting Jan. 1, the income-tax rate will drop to 20.5 per cent, from 22 per cent for taxable earnings between $45,282 and $90,563.

The rate on all income earned beyond $200,000 will rise to 33 per cent, from 29 per cent. About 319,000 Canadians will reach the upper tax level.

An evaluation by the Finance Department, however, found the projected revenues the Liberals expected to generate from their election vow were, in fact, off the mark.

The higher tax rate in the new, upper bracket is not expected to bring in as much revenue as anticipated, in part because the biggest earners are expected to make more of an effort to avoid taxes.

"Actually, there have always been, throughout the campaign many different economists with very different analyses of how much it was going to cost, how much it was going to bring in," Trudeau said.

The essence of the commitment, he said, remained the same: raise taxes on the wealthiest one per cent, while lowering taxes on the middle bracket.

"We know that it's not just good for middle-class Canadians to get more money in their pockets every paycheque, it's also good for fighting against the income inequality that continues to be a problem for growth in Canada," he said.

The government has also faced flak over the fact people making $90,563 and higher will receive the largest possible benefit of $679.

It's only once people hit the $217,000 mark that the pinch of the highest tax rate erases the benefit entirely.

Conservative finance critic Lisa Raitt has accused the government of breaking promises because the tax changes won't be revenue-neutral and for the $10-billion annual deficit caps.

"We now know definitively that this is going to be a structural deficit inherent within," Raitt told reporters.

The opposition New Democrats, who voted in favour of the tax-package motion, have said the tax-rate changes should have been extended to also benefit those who earn less than $45,282.

The motion will also cancel the Conservative move to increase limits on tax-free savings accounts to $10,000 from $5,500, also as of Jan. 1. The new Liberal legislation, however, will index the ceilings on the popular accounts to inflation.